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Zoom Video Stock: Oversold Pandemic Darling Looks Cheap
Stock Analysis & Ideas

Zoom Video Stock: Oversold Pandemic Darling Looks Cheap

Shares of one of the biggest pandemic winners, Zoom Video Communications (ZM), continued lower as broader markets fell back to those ominous March lows. Indeed, the Nasdaq is back in a bear market, and leading the charge lower are those incredibly expensive stocks, many of which are included within Cathie Wood’s ARK Innovation Fund (ARKK).

Zoom Video may have been a pandemic-era bubble. Still, down over 82% from its all-time high, it seems like the Zoom bubble has (mostly) burst. Like during the aftermath of the 2000-01 dot-com bubble bust, several intriguing names eventually did arise from the wreckage.

Still, those expecting a V-shaped recovery will be left disappointed. Though I wouldn’t rule out a return to the $500 per-share mark in Zoom Video over the next 10-15 years, I do think a drastic reset of expectations needs to accompany the stock’s violent valuation reset.

ZM Stock: Damage Has Been Dealt, but That Doesn’t Mean a Bottom is In

Indeed, Wall Street analysts have already lowered the bar on their price targets. Still, many are not get ready to downgrade their Buy recommendations. With zero Sell ratings on the name, I do think that Zoom Video stock is now more of a deep value stock, even though it was dubbed as a high-growth speculative play in the back half of 2020.

With ZM stock trading at a modest 7.2 times sales multiple, I think the crash in the name seems a bit overdone. Though I do expect Zoom Video stock to fall further, it is likely to be dragged lower as investors continue throwing in the towel on everything tech. Additionally, should margin calls exacerbate broader market selling pressure, don’t be so surprised if the stock continues tumbling, even as quarterly results come up far better than expected.

These days, rate hikes and the Ukraine-Russia crisis seem more influential than the performance of individual businesses themselves. However, once the wave of macro fear fades, fundamentals will once again move stocks, as they should in typical market environments. For now, I am bullish on ZM stock in the long term.

That said, I do expect more choppiness going into the summer months, especially once more rate hikes are in the books. Currently, markets seem to expect a half-point hike next month. Anything more or less than a half-point hike could be a source of intense volatility in both directions.

Zoom Video: More Than Just a Video-Conferencing Play

Zoom had the perfect setup going into the early innings of the COVID-19 pandemic. The technology was top-notch, and demand was through the roof as lockdowns struck and work-from-home orders were given.

Fast-forward to today, and few are thinking about COVID-19 anymore. We’re not in an endemic yet. Still, many Americans would rather not repeat the events that unfolded in 2020. The economic damage was severe, and the world is still paying the price today, with rampant inflation in response to all the stimulus.

Though lockdowns are unlikely, I expect remote and hybrid work is not going anywhere, even with potential variants out there. If anything, the pandemic showed that workforces could be more productive working from home than in the office. Further, given continued enhancements to remote work technologies driving the digital transformation, I expect the work-from-home trend will not revert to pre-pandemic levels anytime soon, if ever.

Zoom Video provides conferencing tech that we’re all very familiar with by now. However, the company doesn’t just stop at its flagship offering. It’s hard at work to prove that it’s no one-hit pandemic wonder. Though investors will treat it as such, I think Zoom will establish itself as it continues focusing on what it can control.

Zoom’s latest Q4 results were better than expected. Still, investors didn’t reward the stock. As the company focuses on product offerings in the broader collaboration space, I think it can upsell its current customers. Though pandemic-era growth will be virtually impossible to achieve, I do believe that a 20% sales growth rate is achievable, even if a recession looms.

Zoom’s Video product has become a household name. Many of us now use the term “Zooming” when referring to workplace video calls, just as we do “Googling” when referring to searching for something on an Alphabet (GOOG)(GOOGL) search engine.

Zoom is synonymous with collaboration tools, and with the digital transformation still very much in play, I wouldn’t give up on the company. It’s still innovating, and although returns are likely to be modest moving forward, I still find value in the name that’s fallen oh so hard.

Don’t Discount Innovative Wildcards

Investors may not care much about growth buzzwords these days, but I still think they matter. The metaverse is no longer exciting enough to punch your ticket into a metaverse stock these days. Still, the metaverse represents a massive market, and I do think Zoom is equipped to make a move into the digital office environments that could become commonplace in the virtual worlds of the future.

The market for collaboration tools market is considerable. The metaverse market could also prove massive over the next decade. With the potential to break into both markets, I think today’s valuation severely discounts the company’s longer-term growth profile.

Wall Street’s Take

Turning to Wall Street, ZM stock comes in as a Moderate Buy. Out of 26 analyst ratings, there are 12 Buys and 14 Hold recommendations.

The average Zoom Video Communications price target is $162.56, implying upside potential of 64.9%. Analyst price targets range from a low of $100.00 per share to a high of $295.00 per share.

The Bottom Line on ZM Stock

Zoom Video is a wonderful company with a brilliant, visionary CEO. Nobody knows when the pain in Zoom stock will end, but I think Zoom is one of many pandemic winners that will see better days again over the years.

Growth wildcards and new innovations will not save it from this sell-off. Still, I can’t help but think the valuation on the name today is a tad depressed, given the long-term trends still riding in its favor.

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